Global Markets
Investor concerns are now dominated by the newsflow coming from the Middle East but reactions have been limited so far. Oil has started to move higher, pricing in the risk of escalation of the conflict but equities do not look overly perturbed at this stage. This is a pretty typical reaction to the sort of events we have seen so far, with investors usually making minor adjustments in response to geopolitical events and any initial losses usually being recovered in a relatively short time frame. The primary risk here is the involvement of other countries (especially Iran) in a direct confrontation with Israel, and the fear that events will spiral out of control. At this stage there is the hope that the US and other nations can major on diplomacy, encourage ‘restraint’ and prevent a spread of the fighting. The danger of course is that unexpected events occur in military conflicts and that these may conspire to make market moves thus far look like wishful thinking. As we wrote last week, the potential for this becoming a much more significant event for equity markets is very real and if we were not already of a somewhat cautious mindset it would probably be sufficient to move us to such a stance. If other investors decide that this is just one risk too many when they already face an outlook threatened by recession and inflation, then a sell-off in equities cannot be discounted.
These worries aside, the US economy continues to turn out strong numbers – retail sales being just the latest example. This is keeping investors engaged for now, though they are also keeping a keen eye on the bond markets where yields remain high. This might mean that the upside for equity markets is limited in the near term even if the economic newsflow remains positive, which again strengthens our conviction that high quality equity needs to be accompanied by protective assets in portfolios, which will help if things deteriorate from here. For some, our caution has been an example of being ‘too early’ in markets, but this is sometimes the price one has to pay for being properly prepared. We make no apology for repeating, we prefer to hold our nerve rather than hold our noses and buy what is not right.
The importance of income
Given a tough outlook and the likelihood that equity returns will struggle to match those of the last decade over the remainder of this one, it is possible to make the case that income is going to be an increasingly important component of total return for investors. For those who see parallels between the state of the global economy and geopolitics now and that which maintained in the 1970s, there is even more reason to look to income as it proved especially important at that time. We do not focus exclusively on income of course but can shift our portfolios to emphasise or de-emphasise its role. Our current take on this is demonstrated by the recent introduction of a standalone global equity income in portfolios and we also access the theme to a significant degree in our other geographically oriented allocations, with the UK and Europe both being markets which are rich in opportunities for income investors. Our new UK Dynamic (UK Equity) Fund is a case in point – it has the flexibility to go between growth and income and starts life with a yield of c.4.25%, showing that we are seeing value in income paying stocks. Bonds are also doing their bit in offering income having previously looked as if they were a return-free risk for investors.
Click here to read our thoughts on asset allocation.
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Investment Line is written and edited by Chief Investment Officer Simon Gibson and Investment Strategist Richard Smith and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.
All content correct at time of writing.
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